Income Tax On Gratuity

Introduction

In this article I will be writing about the tax liability on the gratuity amount received from your employer. I have received lot of questions from our readers asking  doubts on the same topic. It is good I will write a article explaining the different areas on the gratuity tax exemption. It will be very useful for those who like to know better about the gratuity income and how it is taxed on your hand. If you have any doubts, please post it in the comments section. Please subscribe to our future articles here.

What is Gratuity?

If you are working for a company more than five years continuously, the employer has to pay you one lump sum amount while leaving the company. It is only if you stayed in the same company for more than five years.

Previously there is not such compulsory rule to pay the gratuity amount to the employees. In 1972, the government passed the Payment of Gratuity Act that made the gratuity compulsory if the employer has more than 10 employees.

Gratuity Income

Gratuity income category is classified under three categories. Based on the category, the taxable amount will be different. The following are the three categories:

1. Death-cum-retirement gratuity  received
2. Gratuity received by persons covered under the Payment of Gra-tuity Act, 1972
3. Any other employee

1. Death-cum-retirement gratuity  received

If any of the death-cum-gratuity received by the central or state government employees, defense employees and employees in local authority will be fully exempt from the tax.

2. Gratuity received by persons covered under the Payment of Gratuity Act, 1972

Will be exempt up to the following limits:

• For every completed year of service, gratuity will be paid at fifteen days wages per year. The per day salary is calculated at the time of last day of the service.
• The amount of gratuity as calculated above shall not exceed Rs. 3,50,000.
• Formula for calculating gratuity : Gratuity = Last drawn salary x 15/26 x No. of years of service

3. Any other employee

Will be exempt up to the following limits:

• Exemption shall be limited to half month salary (based   on  last   10   months   average)  for  each completed   year   of  service   or   Rs 3.5  lakhs whichever is less.
• Where the gratuity was received in any one or more   earlier   previous   years   also   and   any exemption was allowed for the same then the exemption to be allowed during the year gets reduced   to   the   extent   of  exemption   already allowed, the overall limit being Rs 3.5 lakhs.
• Formula for calculating gratuity : Gratuity = Last drawn salary x ½ x No. of years of service

Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax

Summary

I hope this article will be useful to understand the gratuity payment in detail. If you have any doubts please post it in the comments section. If I have missed out any important points in this article, please point me. I know there are many readers who are retired persons. They will have good knowledge on gratuity payment. Thank you for reading this article!!!

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